China's Brewing Bubble

China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the one trillion dollars blitz of new lending issued since December, writes Ambrose Evans-Pritchard.

His commentary is based on analysis out of Fitch, the rating agency.

Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al).


Writes Pritchard:

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

China's M2 annualized money supply growth was 25.7% in May and 26.0% in April, according to the People's Bank of China. This is obviously very extreme money growth. It, however, does not mean a crash is just around the corner. A regime can keep money growth high for an extended periods of time, especially in an economy where productivity is climbing rapidly, but eventually the price inflation kicks in and slowed money growth creates the crash period.